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Scrapping the Backpacker Tax?

The Australian government is being pushed to backtrack on its 2015 “backpacker tax” budget measure after intense public pressure and lobbying from agriculture and tourism groups who say the tax changes will significantly impact their industries. The Government is now undertaking a cross-departmental review to assess alternatives for sourcing the $540 million of revenue the backpacker tax was projected to generate over a three-year period from 1 July 2016.

Working holiday makers are currently classified as residents for tax purposes, with access to Australia’s $18,000 tax-free threshold. The proposed revenue-raising budget measure, due to be introduced on 1 July 2016, would see those backpackers classified as non-residents for tax purposes and subject to income tax of 32.5c for every $1 they earn.

What does this mean in practice? Under the current scheme, a working holiday maker who earns the average backpacker income of $15,000 will pay no income tax during their stay in Australia. The proposed changes scheduled for 1 July would see that same individual instead pay $4,875 in income tax. Working holiday makers would be further hit upon departure from Australia with a higher rate of tax applied to their withdrawn superannuation balance than other temporary residents.

Those who argue against the introduction of the tax cite figures which indicate backpackers put almost all their earnings back into the Australian economy through expenditure on accommodation, travel, food and other items. Farmers have raised concerns about labour shortages and the ability to recruit workers during key seasonal harvests. With working holiday visa grant numbers already down 5.3% in the 2014-2015 programme year compared to the previous year, the tourism industry believes the introduction of the tax could see a further decrease in backpacker tourism numbers for future programme years.

The Government is considering a range of proposals under its cross-departmental review include removal of the tax-free threshold for backpackers, and the introduction instead of a 15% tax rate on all income, the same as that paid by Pacific Islanders on 6-month visas under the Seasonal Worker Programme. The Government’s focus is on finding a “revenue-neutral” solution to the issue, meaning the money has to be found somewhere, and fast – the next budget is due to be announced in just a few weeks.

Nomos will keep you updated on developments in the coming weeks. Watch this space!

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